Over at Curley's Cafe, the self-proclaimed home of the best chili for miles around, a bunch of the boys were leaning against the bar, downing their beers or something a little stronger in the middle of the afternoon.

They were oil men, most of them, having a couple after getting off work, not quite ready to head home. Outside of Curley's, a dark green oil pump bobbed in the parking lot, just as hundreds of others do here in Signal Hill.

Curley's, a local landmark since 1932, has served generations of roughnecks and roustabouts their breakfasts and their beers. Its walls are filled with oil memorabilia--pictures of drill bits and derricks and the boom days.

But owner David Frick has noticed a change of late. Many who drop in to lunch at Curley's don't have anything to do with the oil business. Some even wear coats and ties.

"The oil patch is dying and the roustabouts are leaving," Frick said as he sat in a restaurant booth sipping a cup of coffee.

And therein lies the story of Signal Hill, one of the most famous addresses in petroleum history as well as being one of the smallest cities in Southern California.

Gone are the days when oil was the only thing that counted here. Today, as the California oil industry declines and petroleum prices stagnate, the surface of the land is becoming more valuable than what's underneath it.

Signal Hill is responding by mining new riches--luring lucrative new businesses to its commercial center. But in doing so it is unearthing a new question: Can what is left of the oil industry, the city's lifeblood for so long, coexist with the hundreds of new homes and businesses that are on the drawing board and slated for development?

Curley's, once surrounded by nothing but oil fields and pipelines and drilling equipment, now finds itself in the middle of a rapidly expanding commercial district that includes, among other things, a major auto mall and a huge Home Depot. A Toys R Us recently opened down the street, as did a major paint supply house. The only obvious thing Signal Hill lacks (not from a lack of trying) is a supermarket.

The 2.2-square-mile city with a population of 8,000 remains a place with oil-soaked earth, weed-clotted lots, cracker-box houses, prostitutes, dumpy motels, dance halls and used car lots on Pacific Coast Highway. But there is also an energy aimed at revamping the city's stinky, oil-soaked image.

A sober tribute to that success is the fact is that Curley's, at Willow and Cherry streets, is in danger of becoming a thing of the past.

"The corner is much too important to keep it here," said Frick, the fourth owner in the long history of the bar and restaurant.

The combination of these forces with the development potential of the hill itself--one of the largest tracts of open land in the Los Angeles Basin, blessed with a panoramic view--spells the beginning of the end of the old and oily version of Signal Hill.

Since the first gusher hit in 1921, the city's oil wells have pulled almost 1 billion barrels of black gold from the earth.

But here and throughout the state, marginal wells are being shut down by the thousands. In Southern California alone, fewer than 700 oil wells have been drilled in the last 10 years; more than 5,000 have been capped and abandoned during the same period.

Signal Hill is perhaps the most symbolic example of this change, primarily because of a rough-and-tumble history that reflects the tremendous importance the oil industry has played in the state.

Change does not come easily. When the city recently widened an intersection to allow more traffic through the commercial district, workers first had to dig up and haul away 40 tons of abandoned pipelines. Before the auto mall could be built, the city had to spend more than $7 million in redevelopment funds just to decontaminate the land on which it was to be built.

The difficulty of coexistence is witnessed by three lawsuits pending between developers and Signal Hill Oil Co., which operates most of about 500 wells on the hill. The suits, which contain a number of acrimonious claims and counterclaims of mismanagement, have put a hold on a 525-unit hilltop development that would completely change the look of the city.

City officials say the project will not go forward until at least one of the suits is resolved. It is not scheduled to be heard until November.

Craig Barto, a co-owner of the oil company, said he hoped the suits can be settled soon so development can proceed while he continues to pump oil. "There is still a tremendous amount of oil to be recovered," he said.

*

Signal Hill takes its name from the early days of California, when Native Americans used to signal their counterparts on Catalina Island from atop the 365-foot rise.